Chancellor urges Greece and the rest of the 19-nation eurozone bloc to act "responsibly"
as the newly elected goverment seeks to renegotiate its €240bn (£180bn)
bailout agreement

George Osborne has warned that the standoff between Greece and its international creditors could derail Britain’s recovery, describing the deadlock as the biggest threat to the global economy.

The Chancellor urged Greece and the rest of the eurozone to act "responsibly" as the newly-elected goverment seeks to reduce the country's debt pile and renegotiate its €240bn (£180bn) bailout agreement.

"We had a constructive discussion, and it’s clear that the standoff between Greece and the eurozone is fast becoming the biggest risk to the global economy, and it’s a rising threat to our economy at home," Mr Osborne said after a meeting with Yanis Varoufakis, his Greek counterpart, in London.

"I urged the Greek finance minister to act responsibly but it's also important that the eurozone has a better plan for jobs and growth. We have that plan in Britain and in these uncertain times, now is not the time to abandon that plan.

Greek Finance Minister Yanis Varoufakis and UK Chancellor George Osborne, speak during their meeting at Downing Street in London (Photo: EPA)

Mr Varoufakis described the meeting as "extremely constructive" and "a breath of fresh air", and said he was confident that Greece would reach an agreement with its creditors within "days".

"We have a determination to put an end to the extend and pretend cycle which has rendered Greece a festering wound on the side of the eurozone - which even for Britain is a great concern because the deflationary crisis certainly doesn't [bode] well for the future of the British economy," he told Channel 4 News.

Mr Varoufakis used his visit to London to outline for the first time how he plans to restructure his country’s debt.

The GDP-linked bonds are known as Bisque Bonds, proposed by John Maynard Keynes for distressed states in the 1930s.

They would leave creditors exposed if their own highly optimistic growth forecasts for Greece prove to be wrong, and would create a safety net for Athens.

These would replace existing debt and include “perpetual bonds”, Mr Varoufakis said, describing his proposal as “smart debt engineering”.

“It’s clear that the standoff between Greece and the eurozone is fast becoming the biggest risk to the global economy, and it’s a rising threat to our economy at home,” said Mr Osborne after the meeting. “I urged the Greek finance minister to act responsibly but it’s also important that the eurozone has a better plan for jobs and growth.”

While Britain's direct exposure to Greece is small compared with other European countries, the eurozone remains Britain's biggest trading partner, and a shock in Europe would have implications for UK growth. "We have got to make sure that in Europe as in Britain, we choose competence over chaos," said Mr Osborne.

Mr Varoufakis also met City bankers on Monday as part of a whistlestop tour of Europe following Syriza's general election victory this month. The finance minister will travel to Rome on Tuesday where he will meet Pier Carlo Padoan, Italy's finance minister, while Alexis Tsipras, Greece's prime minister, will meet counterpart Matteo Renzi on the same day.

George Osborne and Yanis Varoufakis greet each other outside Downing Street on Monday (Photo: EPA)

Markets rose on Monday after Mr Tsipras said he was determined to reach an agreement with European partners, ruling out a debt deal with Russia. "We are in substantial negotiations with our partners in Europe and those that have lent to us. We have obligations towards them," he said.

The Athens stock exchange rose by almost 5pc on Monday, after shedding more than 14pc last week. Traders said the more positive tone associated with current negotiations had lifted sentiment in the market. Benchmark borrowing costs in Greece also fell slightly, although 10-year government bond yields remain above 10pc.

Mr Varoufakis insisted there would be no "wild west showdown" between Athens and Brussels "We're not entering this in a confrontational manner.

"There will be a deal within a very short space of time. It's going to make it perfectly clear to everyone that Greece can play within the rules and in a way that puts the Greek crisis away once and for all."

Leftist Syriza, which has formed a coalition with the Independent Greeks, is seeking a renegotiation of its rescue package that will link repayments to growth and reduction of its debt pile, which has grown to 175pc of gross domestic product (GDP).

A source told Reuters that the country would be able to service its debts without causing a "detrimental impact on private bond holders," who have already taken a 50pc haircut on their holdings of Greek bonds.

Wolfgang Schaeuble, Germany's finance minister, said on Monday that Europe's biggest economy would not accept any "one-sided" changes to Greece's rescue package.

"We want Greece to continue going down this successful path in the interests of Greece and the Greeks but we will not accept one-sided changes to the programme," he said.

Mr Schaeuble added that he was prepared to meet Mr Varoufakis to discuss the country's options.

Yanis Varoufakis described the talks with Mr Osborne as "a breath of fresh air" (Photo: Bloomberg)

The so-called "troika" mission has become a negative symbol in Greece, but Ms Wirtz said the German government saw "no reason to scrap this mechanism of evaluation by the troika", as political decisions were based on their findings.

Mr Renzi said on Monday that a “great deal of seriousness, caution and responsibility" was needed on Greece, as he recognised that the debate in Europe had to switch to growth. "We want to change economic policy in Europe, not just for Greece or for another country. We want to shift the debate on economic policy away from austerity and rigor toward growth and investment. From this viewpoint, we are on the front line and I am very happy that this is nowadays a position shared by many in Europe," he told RTL Radio.

“You cannot keep on squeezing countries that are in the midst of depression,” Mr Obama told CNN. “At some point, there has to be a growth strategy in order for them to pay off their debts to eliminate some of their deficits.”